A. Ecological Economics, Green growth, A-growth or Degrowth?
B. Payments for Ecosystem Services – a step towards commodification?
Thomas Hahn, Uppsala/Cemus, 3 October 2019
Outline part A
1. Ecological Economics = interdisciplinary research area
2. World Economic Forum
3. A new macroeconomic model
4. Rebound effect and taxation
5. BAU, Green growth, A-growth or De-growth?
6. Sustainability transformation
7. Four economic principles
School I: Neoclassical economics
microeconomics macroeconomics
welfare economics
natural resource and environmental economics
Formalised by Arthur Pigou (1920)
Aim: to achieve economic efficiency
School II: Ecological Economics
• is an inter-disciplinary research area
• Origins from 1970 (Kennet Boulding, Herman Daly,
Bob Costanza, Ann-Mari Jansson)
• = core of the theory of ecosystem services
• Builds to a large extent on environmental economics
but rejects notions of
– Fixed preferences as basis for valuation (Amartya Sen)
– Optimal pollution
– Discounting the future
Ecolo
gic
al econom
ics
is a
n in
terd
iscip
linary
re
se
arc
h a
rea
Ecology
Physical Resource theory
Neoclassical env. economics
Institutional economics, Law
Political science, Sociology
Psychology, Business organization
Human ecology + all other research
on sustainable development
Global Risks 2018
Based on a survey of
over 1,000 experts from
industry, government,
academia and civil
society
The Worst Nine:
7 of the 9 worst Global Risks are ecosystem-based (2018)
1. Extreme weather events
2. Natural disasters
3. Failure of climate change mitig + adapt
4. Water crises
5. Biodiversity loss + collapse
6. Man-made environmental disasters
7. Food crises
Non-ecosystem-based risks:
1. Cyber attacks
2. Large-scale involuntary migration
Global Risks 2018
= beginning of the biosphere era?
2010 = end of the neoliberal era?
Climate change, water shortage and biodiversity loss dominate Global Risks 2011-2018
The Global elite shift in 2011
• A macroeconomic model for
sustainable development
• Human wellbeing is the goal,
economics provides tools,
the biosphere is a foundation
• Should be Chapter 1 in
Economics!
Economics for the Biosphere + Anthropocene
CAN WE LIVE WITHIN THE
DOUGHNUT? Oxfam Discussion Papers 2012
Kate Raworth
Households Households Firms
Goods & Services
Labour & Capital
Wages & Rent
Consumer spending
The macroeconomic model (a model of
“the economy”) according to text-books 1955
Households Households
Waste
Heat
Households
A more realistic picture of the economy
Goods & Services
Households Firms
Wages & Rent
Labour & Capital
Consumer spending
The Eco-
nomy
The Biosphere
Society
Voluntary unpaid work
Households Households Firms
Goods & Services
Labour & Capital
Wages & Rent
Consumer spending
The Economy according to text-books 2019
Tomorrow’s economists do not get adequate training to
handle Global Risks or address the real economic issues
The Biosphere
The Social System
air
soil
minerals plants animals micro-organisms
biological diversity
water
nutrients
biogeochemical
cycles
ecosystem functioning
thresholds
decomposition
Ecological Econ:
Human wellbeing
depend on the
Biosphere
regardless whether we
understand it or not.
Neoclassical Env.Econ:
The value of nature
depends on human
preferences.
http://www.kateraworth.com/2014/10/16/doughnut-inequality/
The choice is NOT between environment OR poverty alleviation: we can
reach BOTH goals!
Hence, we need to reduce emissions with 81%, not only 80%
The SDGs
https://sustainabledevelopment.un.org/sdgs
The unnecessary
(or even contra-
productive) goal
Achieving SDGs is not sufficient for environmental sustainability: only 14 % of SDG indicators measure
natural resource security (Wackernagel et al. 2017)
Decoupling is required for Green growth
• 23% reduction in fossil CO2 is
good! But it excludes imported
goods and international transports
• The Decoupling concept
reinforces GDP-obsession.
Welfare should be increased!
• “Be agnostic about GDP growth”
(van den Bergh, Kate Raworth)
(“a-growth”)
GDP
Change GDP to a real Welfare
measure!
EU has also reduced GHG emissions by 22%
No global decoupling between GDP and Natural resource use * Now 90 Billion tonnes/year. * In many EU countries it was reduced during the financial crisis, which inspired the degrowth movement
Consumption-related GHG emissions/capita, Sweden
Sweden’s territorial emissions/capita =4,25 ton CO2 (5,3 ton GHG)
(42,5 billion tonnes/10 Million people)
This is only half of consumption-related emissions (10 tonnes GHG/capita)
• https://data.worldbank.org/indicator/EN.ATM.CO2E.PC?locations=CN-SE
China’s per capita emissions of CO2 is higher than Sweden’s (territorial emissions)
Sweden’s territorial CO2-emissions/capita is lower than the global average
4,9 ton
1960 2010
http
s://d
ata
.world
bank.o
rg/in
dic
ato
r/EN
.AT
M.C
O2E
.PC
?
Rebound effect
• = Jevons’ paradox (1865)
• Technical innovation -> energy efficiency -> energy price
decreases and demand increases
• How can the rebound effect be stopped?
• Carbon tax! And similar tax reforms!
Total environmental tax revenue, EU-28, 2002–17 (%)
https://ec.europa.eu/eurostat/statistics-explained/index.php/Environmental_tax_statistics https://ec.europa.eu/eurostat/statistics-
explained/index.php/Environmental_tax_statistics#Environmental_taxes_in_the_EU
The total revenue from environmental taxes in the EU-28 in 2017 was EUR 368.8 billion; this figure equates to 2.4
% of gross domestic product (GDP) and to 6.1 % of the total revenues derived from all taxes and social
contributions. Despite all talking, no tax shifting has occurred since 2002! It’s a scandal!
Share of total taxes
Share of GDP
2017 2002
Four strategies concerning GDP growth
• Business As Usual (BAU): No major regulations needed, focus on
innovation and decoupling will follow
• Green/Sustainable growth: Green tax reform and other regulations
will incentivize innovation and decoupling will follow
• A-growth: Focus should be sustainability transformations, invest in
sustainable tech and divest in fossil. GDP growth should not be a
goal but GDP might increase during the transformation.
• De-growth: Sustainable tech must increase but fossil sectors must
decrease faster, even during the transformation.
Sustainability transformation Probably results in slightly smaller GDP/capita in Sweden, a lot higher in
Bangladesh
PPP dollar/capita today:
Sweden: 50,000
Bangladesh 4,200
Save the climate system? Yes please, but only as
long as GDP increases!
Beslut
Sverige får ett klimatpolitiskt ramverk och en klimatlag (MJU24)
Riksdagen sa ja till regeringens förslag om ett klimatpolitiskt ramverk för Sverige. Det klimatpolitiska arbetet bör utgå från ett långsiktigt,
tidssatt utsläppsmål som riksdagen fastställer. Målet ska vara att Sverige senast 2045 inte ska ha några nettoutsläpp av växthusgaser till
atmosfären. Efter det ska negativa utsläpp uppnås. Riksdagen sa också ja till ett etappmål för utsläpp av växthusgaser till 2030 och 2040
och ett etappmål för utsläpp från inrikes transporter. Delar av det klimatpolitiska ramverket regleras i lag genom den nya klimatlagen. Lagen
innehåller grundläggande bestämmelser om regeringens klimatpolitiska arbete. Klimatlagen börjar gälla den 1 januari 2018.
Riksdagen riktade ett tillkännagivande till regeringen om att klimatpolitiken ska vara långsiktigt effektiv och bedrivas så att minskade utsläpp
av växthusgaser förenas med tillväxt.
Utskottets förslag till beslut: Bifall till propositionen. Utskottet föreslår med bifall till motionerna 2016/17:2670 yrkande 1 i denna del och
2016/17:3167 yrkande 1 ett tillkännagivande om att klimatpolitik ska vara långsiktigt effektiv och bedrivas så att minskade utsläpp av
växthusgaser förenas med tillväxt. Avslag på övriga motionsyrkanden.
Riksdagens beslut: Kammaren biföll utskottets förslag.
https://www.riksdagen.se/sv/dokument-lagar/arende/betankande/ett-klimatpolitiskt-ramverk-for-sverige_H401MJU24
• This means, in plain English, that climate politics should be ”efficient” and that
”reduced emissions of GHG should be combined with economic growth”
• The Swedish ”Climate law” cannot challenge GDP growth
• (mix between BAU and Green growth)
Svenska Dagbladet 7 September, 2019
Johan Rockström: Önsketänkande med
grön tillväxt – vi måste agera
Jag vill vara tydlig från start, detta är en pessimistisk
krönika. Jag kommer att sätta frågetecken kring två
grundläggande utgångspunkter som jag själv alltid
försvarat, nämligen (1) att det är möjligt att stoppa den
globala uppvärmningen vid 1.5 grader, och (2) att det
är möjligt att uppnå "grön tillväxt” dvs frikoppling
(decoupling)
https://www.svd.se/onsketankande-med-gron-tillvaxt--vi-maste-agera
Four important economic principles
1. Opportunity cost (basis for all costs)
The cost of a particular choice (resource use) is the forgone net benefit
of the best alternative choice, e.g. Yangtzi River.
2. External cost
Market price does not include all costs
3. Incentives
The expected awards or punishment (“disincentive”) of a particular
action
4. Cost effectiveness
To reach an environmental target at least cost
Example of opportunity cost
The forests in Upper
Yangtzi River
regulates water
flows: this value is
estimated to be ten
times higher than the
timber value!
The opportunity cost of cutting the trees is
the forgone benefits of keeping the forests
(flood regulation, biodiversity, recreation…)
External costs • Sir Nicholas Stern, former Chief Economist of the World Bank, released his
Report on the Economics of Climate Change in November 2006. It was
requested by the UK Government and has been endorsed and supported by
Nobel Prize winners, the World Bank, and other leading institutes. Its main
messages:
• “Climate change is the biggest market failure in human history” (Emissions of
GHG give rise to external costs)
• “The benefits of strong, early action on climate change outweigh the costs of
action” (CBA framework)
• “We can manage the transition to a low carbon economy! It will only cost 1%
of the global GNP every year.
The Stern Report
• Its main messages:
• “Mitigation – taking strong action to reduce emissions – must be viewed as an
investment”
• “If these investments are made wisely, the costs will be manageable (1% of
GNP), and there will be a wide range of opportunities for growth and
development along the way”
• If we continue “business as usual”, we risk major social and economic
disruption (5-20% of GNP), similar to the economic depression of 1930s
• Strong global regulations need to be implemented within the next 5-10 years
Prisoners’ dilemma
= incentives to fish too much Revenue 5, 5 2, 10 7, 7
Cost 1, 1 1, 5 5, 5
Net 4, 4 1, 5 2, 2
Neighbour (N)
Outcome (M, N)
Fishing moderately Fishing too much
Myself (M)
Fishing moderately
4, 4
1, 5
Fishing too much 5, 1 2, 2 Nash equilibrium
Prisoners’ dilemma Revenue 5, 5 10, 5 2, 7
Cost 1, 1 2, 1 1, 5
Net 4, 4 8, 4 1, 2
My action is ”a drop in the ocean”
7, 7
5, 5
2, 2
50 other villagers (V)
Elinor Ostrom
Outcome (M, V)
Fishing moderately Fishing too much
Myself (M)
Fishing moderately
4, 4
1, 2
*3,92 Fishing too much
8, 4* 2, 2 Nash equilibr.
Tragedy of open access
Degradation of ecosystem
services often causes significant
harm to human well-being
– “The total economic value
associated with managing
ecosystems more sustainably is
often higher than the value
associated with conversion”
(Opportunity cost)
– “Conversion may still occur
because private economic benefits
are often greater for the converted
system” (external costs)
– “Governments should first stop
subsidies to such conversions, then
subsidize production of ecosystem
services” (incentives)
Economics is not equal to money!
Four important economic principles
1. Opportunity cost (basis for all costs)
The cost of a particular choice (resource use) is the forgone net benefit
of the best alternative choice, e.g. Yangtzi River.
2. External cost
Market price does not include all costs
3. Incentives
The expected awards or punishment (“disincentive”) of a particular
action
4. Cost effectiveness
To reach an environmental target at least cost
Cost effectiveness
What is an ‘effective’ cost? As low as possible of course!
Definition: to reach a non-monetary target at the lowest monetary cost,
alternatively to get as much of the target as possible for a limited budget.
Assume there are two firms that together must reduce pllution by 50%. What is
the cost effective allocation?
Tons pollution
MC aggregate reduction
MCredB MCredA
24 12 6
MC = Marginal Cost for reducing
pollution
Definition: Cost effectiveness occurs whenever
MCred A= MCred B
8 4
A reduce 8 tons, B 4 tons
Cost-effectiveness including
system change
• Baltic Sea Action Plan: Conventional analysis
concludes that cost-effective measures to
achieve the goal cost 4 billion €/year
• However, the cost can be much smaller if you
adapt diet to what is ”Baltic Sea smart”
• Södertälje municipality received White Guide Junior Award for Best School-
Food in 2014 and Sara Jervfors was awarded a personal prize.
• The transformation was a change of food system at almost zero cost: same
budget as before despite 50% organic
• By changing design (”changing the system”) transformations can be achieved
much easier (much cheaper)
B. Payments for Ecosystem Services
1. Public goods and other market failures
2. Payment for ecosystem services (PES)
3. Six degrees of commodification
4. Biodiversity offsets
5. Commensurability and Commodification
6. Can markets save biodiversity?
7. Transforming institutional drivers yes, but don’t forget
Economic Drivers!
Public goods and other market failures
• Pareto efficiency = a feasible allocation is efficient if there is no other
feasible allocation such that the utility of a least one person is higher and
the utility of nobody is lower.
• In a free market both seller and buyer have veto right. A market
transaction therefore results in increased efficiency.
• However, the classic market failures are: externalities, public goods and
natural monopoly.
• Public goods are non-excludable and non-rival: people cannot be
excluded from benefitting from it and the benefits enjoyed by one person
does not reduce the benefits that could be enjoyed by others.
• Investments in public goods tend to be too small because the investor
cannot reap the benefits. Argument for taxation.
Payments for Ecosystem Services (PES) = popular policy for biodiversity conservation
Payment often to a certain land-use; land-use is commodified, not outcomes
Level of payment is NOT a valuation of biodiversity but set pragmatically to
compensate for forgone net benefts of growing wheat, in other words to
overcome the opportunity cost of biodiversity conservation
Hence, rather a “compensation” than “payment”
97-99% paid by governments and other public sources (WB, GEF)
Government PES uses the “price signal” (like a tax) = economic instrument
It is NOT a market instrument, since it does not rely on the price mechanism
(market mechanism), i.e.” the autonomous mechanism that determines the
price in a market economy, as an equilibrium between supply and demand”
The term “market-based instrument” is confusing! No trade!
Hahn et al. 2015
Hahn et al. 2015
PES in Costa Rica
Costa Rica is one of the most well-known examples of national PES, often framed as a neoliberal market-based conservation mechanism
Costa Rica PES is successful because it’s NOT neoliberal:
enabled by Forest Law (1996) that banned land-use change
largely financed through a carbon tax (+ water tariffs)
government is the only buyer (hence it’s not a market)
government priorities high poverty areas and “biological corridors” (in
accordance with CBD)
Other countries (Ecuador, Bolivia) also explore these four criteria
Biodiversity offsets (Ecological compensation)
• Every year about 86,000 ha of green area is “developed” only
within the EU member states.
• The EU has suggested, in its 2020 Biodiversity Strategy that these
losses should be compensated for by ecological restoration:
“Even when every effort is made to avoid, minimize and restore, human activities
can still have negative impacts on biodiversity. To avoid a net loss of biodiversity
and ecosystem services, damages resulting from human activities must be
balanced by at least equivalent gains.”
• The problem is how to design Biodiversity Offset programmes
• There are many controversies – can you really compensate for
unique ecosystems? Does ecological restoration work? Can this
new instrument actually lead to “license to trash”?
Biodiversity Offsets (B.O.) have strong proponents
• Biodiversity offsets are promoted by The CBD and The EU (2020 Biodiversity Strategy)
• The first three “steps” of the Mitigation hierarchy are the same as for Environmental Impact
Assessment (EIA): Avoiding, Minimising, and Restoring on-site afterwards.
• The fourth step is Offsetting (compensation) somewhere else.
http://bbop.forest-trends.org/pages/mitigation_hierarchy
Commensurability and commodification
• Biodiversity offsets are interesting because they consist of two transactions
where the first one concerns commensurability and the second
commodification.
• First, a degraded area is ecologically compensated by a restored area.
Here, commensurability is generally restricted to the same type of habitats
or the same ecosystem services.
• Secondly, the actor providing the biodiversity offset is compensated with
money. This transaction can be done according to a predefined list where
one hectare of restored grassland has a fixed price (as in Germany) or
acccording to market negotiations (as in the US). Hence the degree of
commodification can be low or high in biodiversity offsets schemes
Koh et al. (2019)
Sustainable
development is
often based on full
commensurability
(substitutability)
= central
assumption in
neoclassical
economics
Biodiversity
offsets are based
on restricted
commensurability.
Only the US
programs may be
called market
solutions
Hahn et al. 2015
Valuation of ecosystem services
Methods and decision
support in:
Suitable for ecosystem services which …
Monetary terms
(Contingent valuation, Cost-
benefit analysis)
… we have sufficient knowledge about and for which
monetary valuation is ethically uncontroversial e.g. timber,
water purification, recreation values
Quantitative terms
(mapping, defining status and
trends, statistics, multicriteria
analysis)
… can be measured but difficult to translate to money due
to complex multi-functionality and tradeoffs/synergies in
e.g. wetlands and forests
Qualitative terms
(stakeholder dialogue, SWOT-
analysis, scenario, multicriteria
analysis)
… are difficult to measure due to sensitivity to threshold
effects/irreversibility and or significant insurance values.
Improved knowledge is needed to handle uncertainty
Hahn et al. 2015
Can markets save biodiversity?
• In neoliberal theory, markets are thought to be more efficient than
government regulation, almost by definition (lowering transaction costs)
• The assumption is that both seller and buyer have incentives to make sure
that quality is high. ”Market relations are built on trust”
• However, if the traded goods/services are public goods, both seller and
buyer have incentives to compromise quality. Strong government regulation
and enforcement is needed to ensure quality.
• Markets for ecosystem services (MES) therefore require MORE, not less,
regulations. Hence transaction costs are likely to INCREASE when public
goods are traded on market (compare school and old age health services)
The Intergovernmental Platform on Biodiversity and Ecosystem Services
www.ipbes.net
Inter-governmental Platform for Biodiversity and ES (IPBES)
Regional assessment for Europe and Central Asia (ECA)
IPBES ECA Chapter 4 on Drivers: Complex causality
Fig. 4.7
Causal loop
diagram
illustrating
drivers
(causes) of
natural
resource
extraction
(IPBES 2018/
Elbakidze &
Hahn)
Indirect drivers to biodiversity losses
• Almost all direct drivers have been slowed down in the EU thanks to regulations/institutional divers (Environmental regulations for N, P, SO2, CO2, invasive species, Common Fishery Policies)
• However, most direct drivers have been reinforced due to economic drivers like growth, trade, and employment policies (mining and other natural resource extraction globally, pollution, CO2, invasive species, forestry, agriculture…)
• Net effect on biodiversity is often negative, due to increased GDP, lower prices of minerals (which causes less interest in circular economy) and technological change which usually respond to economic incentives. However, technology also responds to environmental regulations and taxation.
• As long as GDP growth is an overarching political goal (Cultural driver), it is difficult to halt biodiversity loss
Conclusions
Payments for Ecosystem Services and Biodiversity Offsets can be designed with more or less “market” components. The devil is in the detail! Some degree of commodification can be effective
Good news: economic instruments have no inherent preference for “pure markets”/neoliberalism – they can fit different political cultures
Market actors have limited incentives to ensure quality of traded public goods, hence markets cannot be entrusted to “save biodiversity”
We need to transform both institutional drivers and economic drivers. This requires a change in the belief system (cultural driver), especially in how GDP is used as a proxy for well-being or success
Tack!
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